RBI asks banks not to refer to its 2018 circular on virtual currencies

RBI stated that banks should nevertheless continue to conduct due diligence in such transactions

The Reserve Bank of India (RBI) has asked banks not to restrict trading in cryptocurrencies by citing its circular issued in 2018.

The central bank, in a circular issued on Monday, stated that banks should nevertheless continue to conduct due diligence in such transactions.

One of the most interesting asset classes in recent years has been cryptocurrency. Despite being a growing asset class, there has been a question of its validity as a currency. Banks are limiting their exposure to cryptocurrency due to a lack of regulatory clarity, and crypto exchanges and users have taken to Twitter to mention this.

Lawyers point out that Indians need not shut their doors to crypto. “Currently, basis Supreme Court’s March 2020 decision, there is no bar on Indian banks from processing transactions in crypto space, either domestic or cross-border, under LRS,” says Anu Tiwari, Partner, Cyril Amarchand Mangaldas.

“The RBI’s report on Currency and Finance 2021 elaborated on the need for and challenges concerning the issue of Central Bank Digital Currency (CBDCs) in India. This report recognised the potential of CBDCs for financial inclusion. It also highlighted how CBDCs pose a risk of disintermediation of the banking system, which would be a key factor,” says Tiwari in a blog post.

Meanwhile, China has banned crypto and Europe is considering it.

“There has been ambiguity on what banks can do and what they cannot. While the Supreme Court order allows crypto trading, banks are taking their own risk-based decisions on whether to be involved in such transactions. Banks are being cautious since nothing in the law explicitly states what is right and wrong when it comes to cryptocurrencies,” says Yajas Setlur, Principal Associate at J Sagar Associates.

After witnessing a tremendous jump in one year, cryptocurrency has fallen in May. From Rs 42 lakh at the end of April, Bitcoin, the most well-known form of virtual currency, has fallen to Rs 26 lakh. Ethereum started falling in the third week of May from Rs 3 lakh to currently trade at Rs 1,81,000.

Experts say it will take time for the crypto to recover from this fall. “This time the fall is because of China banning crypto and it will take at least four months for it to recover,” says Kshitij Purohit from CapitalVia Global Research. “In the past every time there has been a fall of more than 40%, it has taken few months for crypto to recover. The reason for crypto to witness major growth was because of a global acceptance,” he said.

Crypto expert Hitesh Malviya says that such a correction is normal as it is the same kind of correction virtual currencies witnessed in 2017 and it will bounce back soon. “Bitcoin will definitely bounce back,” he added.